Sergey Drobyshevsky spoke on prospects of Russian economy in 2025

Inflation and policy of the Bank of Russia this year attract major attention from experts and politicians, even more than economic growth and the situation in the real sector of the economy. On the one hand, inflation remains rather moderate by Russian standards, at 8-9% per annum over the last 12 months, while on the other hand, it is at least twice the target level of the Central Bank of Russia, which forces the central bank to tighten monetary policy and raise the key rate. Indeed, not so long ago, in the noughties, up to transition to the inflation targeting regime in 2013, the average annual inflation rate in the Russian Federation was above 10% and only after the 2008 crisis it fell into the single-digit range, while at that time there was rapid economic growth.

However, firstly, this growth was partly recovery after deep economic decline in the 1990s with a low base, and secondly, it was based on the rapid expansion of commodity exports and the inflow of petrodollars. Both factors are insensitive to the inflation rate; moreover, after the galloping inflation of the 1990s, price growth around 10% per year was perceived by economic agents as low. Currently, growth of the Russian economy is based on development of the domestic market, exports of non-resource non-energy exports and investments in domestic production. These growth drivers are much more sensitive to inflation, and, most importantly, the current inflation rate is not sustainable and is maintained largely due to rigid measures of the RF Central Bank. There is no combination “inflation - key rate”, where inflation remains above 10% per annum, and the rate is also reduced to 10-11%. With a lower key rate, inflation will increase even more, at least to 15-20%, which will have an even greater negative impact on growth than the high key rate of the RF Central Bank. The tougher and more consistent the CBR pursues its policy, the shorter the period will be for maintaining an abnormally high key rate in order to reverse inflationary trends. Expanding consumer demand is another disputable aspect of Russia's economic development at the current stage. In particular, growth in real retail turnover amounted to 8% in 2023 and is forecasted to exceed 7% this year and in 2025. This evidently indicates an increase in the welfare of households, however, growth rates of consumption are too high.

In particular, growth rates of industrial production are 4-5% per year, while consumer demand entails an increase in imports even with all the challenges related to payments in foreign trade. In addition, it is the rapid consumer demand and consumer credit that become an important factor in price hikes on the consumer market, since production cannot offer enough goods for the market, and investments have to be implemented in order for production capacity to start yielding returns.

Therefore, toughening the CBR's requirements for consumer and car loans similar to the way the central bank opposes the expansion of preferential mortgages may, among other things, help in slowing down inflation and increasing the households' propensity to save.

In 2023-2024, Russia's GDP growth exceeded the initial expectations of both the Government and independent forecasters. Growth rates of 3.5-4% per year have already allowed Russia to become the 4th largest economy in the world in terms of GDP in purchasing power, surpassing Japan. Such growth was due to import substitution, increased budget expenditures and investment activity.

However, all these growth impulses are about to end, and in the next 2-3 years annual growth rates are expected to slow down to 2-2.5%. However, in our view, it is wrong to be unambiguously negative about this forecast. First, there remains the possibility to repeat the experts' team failure, as a number of factors (e.g., limits of import substitution and access to new markets of neutral and friendly countries) remain poorly predictable, and the resulting growth rates will be again higher than forecasts. Second, 2-2.5% is 3-4 times higher than the average growth rate of the Russian economy in a decade before the SMO (0.6-0.7% per year). Third, it is higher even than the potential growth rates of the Russian economy that were discussed in the late 2010s (1.5-1.8% per year), and it is a qualitatively different growth. It is not based on oil and gas exports, rather on domestic demand and the development of the manufacturing industry.

In 2025, according to our forecast, real GDP growth in Russia will amount to 2.1% in the most likely scenario (this is rather a bottom-up estimate), while inflation will fall to the CBR target (4%) by the end of the year, but to implement the disinflationary process, the key rate of the Bank of Russia should remain high (14% on average for the year, not lower than 11% by the end of the year). With regard to the ruble exchange rate, it is increasingly difficult to make forecasts, as the currency market in the Russian Federation is fragmenting due to sanctions restrictions and growing share of ruble and local currency payments for international transactions, but based on the balance of payments forecast, we expect the exchange rate to remain stable without sharp fluctuations in one or the other direction in the range of Rb 90-95 per US dollar.